The 2015 Employer Mandate Is Here

Effective Jan. 1, 2015, two penalties can occur under the employer mandate. These penalties have also been cited as the employer-shared responsibility payments, and, as mentioned above, are also sometimes known as the play or pay mandate, or penalties. Although these payments or penalties have been referenced by many names, they boil down to real dollars that can impact the bottom line:

1. Failure to Offer Health Coverage At All

• $2,000 annual penalty applies to a large employer that does not offer health coverage to at least 70% of its full-time employees (and their children) for 2015 and only if any full-time employee receives a federal subsidy to purchase insurance on a governmental health exchange.
• $2,000 annual penalty applies to a large employer that does not offer health coverage to at least 95% of its full-time employees (and their children) for 2016 and beyond and only if any full-time employee receives a federal subsidy to purchase insurance on a governmental health exchange.
• For 2015 only , this penalty exempts the employer's first 80 full-time employees. For 2016 and beyond, the penalty exempts the employer's first 30 full-time employees.
• Thus, for 2015, the penalty is assessed monthly on all of the employer's full-time employees, minus the 80 full time employees, if 70% of its full-time employees (and their children) are not covered, and only if any full-time employee receives a federal subsidy to purchase insurance on a governmental health exchange.

2. Failure to Offer Health Coverage of 'Minimum Value' and 'Affordable'

• $3,000 annual penalty that applies to each full-time employee who is not offered health coverage that is of “minimum value” and only if any full-time employee receives a federal subsidy to purchase insurance on a governmental health exchange.
• $3,000 annual penalty that applies to each full-time employee who is not offered health coverage that is “affordable” and only if any full-time employee receives a federal subsidy to purchase insurance on a governmental health exchange.
• A plan provides minimum value when it covers at least 60% of the total allowed cost of benefits that are expected to be incurred under the plan. IRS Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act, #20. The Department of Health and Human Services (HHS) and the Internal Revenue Service (IRS) have produced a minimum value calculator to aid in determining whether plans satisfy this threshold.
• A plan provides affordable health coverage if the employee's share of the premium for the employer-provided coverage would cost the employee less than 9.56% (for 2015) of the employee's income.

The first penalty would more than likely be substantially greater than the second penalty for most employers. To avoid the harshest of penalties under the above employer mandate, some employers have explored ways to offer appropriate coverage to avoid the first penalty but to consider some options on coverage, such as “skinny plans” that would, perhaps, implicate the latter penalty with respect to only those employees who received federal subsidies to purchase insurance on a governmental exchange, because such coverage offered was either unaffordable or did not meet the minimum value standards.

Employers would have some insight to this number of employees receiving subsidies on the federal exchangves due, in part, to the Administration's delay of the employer mandate. Because the mandate was delayed to 2015, employers have already received employee premium tax credit notices for 2014, which gave them insight into their workforce. In 2015, these notices will demand review, responses, tracking, and possibly appeal. However, for the first year's receipt of these notices, employers have gained critical insight into their workforce's activity on the exchanges and who is receiving federal subsidies. This information can help to pave the path for strategies moving forward with respect to not offering coverage or offering alternative coverage, such as “skinny plans.”

Implications of Offering 'Skinny Plans'

Controversy has surrounded “skinny plans” on whether or not they satisfy the minimum value threshold required under the second penalty scenario. In fact, these plans over the past year or so have also been called “minimum value plans,” or “minimum essential coverage plans” (MEC plans). Essentially, these plans provide for some health care coverage services, but may exclude others, such as in-patient hospital services, or may just provide preventative services. So do they provide minimum value under ACA? Or if offered, would employers be providing health coverage that does not provide minimum value and thus fall into the second penalty arena?

On Nov. 4, 2014, the Internal Revenue Service issued IRS Notice 2014-69, clarifying that any skinny plan that fails to provide substantial coverage for in-patient hospitalization services or physician services (or both) (“Non-Hospital/Non-Physician Services Plan”) does not meet the minimum value requirements under the ACA. The Department of Health and Human Services (HHS), the Treasury Department and the IRS plan to issue proposed regulations on this clarification this year. Accordingly, employers will not be able to use the Minimum Value calculator to demonstrate that these Non-Hospital/Non-Physician Services Plans provide minimum value. Therefore, the IRS has stated that these plans should not be adopted for a 2015 plan year. If employers adopted these plans prior to Nov. 4, 2014, the IRS has offered transitional relief, so long as certain conditions have been satisfied.

The clarification in Notice 2014-69 answers the question for certain skinny plans on the satisfaction of minimum value requirement. These plans would not satisfy this requirement, thus exposing the employer to the second penalty if this is the only plan the employer offers.

But what if this is not the only plan the employer offers? What if, based on workforce, the employer offers a compliant health coverage plan that meets the tests for minimum value and affordability and then offers a skinny plan? Or better termed, a minimum essential coverage or MEC plan? Why does the terminology change here? Because the strategy changes.

If the employer offers a fully compliant plan to all employees, it avoids both penalties, whether the employees sign up for coverage or not. Then, if the employer offers a second skinny or MEC plan that is admittedly skinny, employees who may not want to spend so much of their take-home pay on health insurance can sign up for the MEC plan while satisfying their personal obligation to have “minimum essential coverage” under the law. Those employees receive basic health care, preventative or otherwise, from the employer, and avoid the individual penalty. The employer may be able to structure the pricing of the fully compliant plan along with the MEC plan to achieve more favorable bottom line results.

In employing this approach, the employer needs to remember the discrimination rules while taking into account which plans are fully insured and which are self-funded, as this impacts discrimination determinations as well. However, when an employer is confronted with a workforce that may be hourly or has heavy turnover, for example, the above strategy may be desirable. In fact, for 2015, 16% of large employers are pursuing this very approach, according to a survey released in Aug. 2014 by the National Business Group on Health. See http://bit.ly/1EdvEP6.

Implications of Reimbursing Employees for Health Insurance

Instead of absorbing ACA penalties, or offering secondary plans, many employers would like to structure cash reimbursements to employees for individual purchase of insurance. However, reimbursing employees directly for the purchase of insurance could subject the employers to significant excise taxes.

On Nov. 6, 2014, the Departments of Labor (DOL), Health and Human Services (HHS), and the Treasury issued a joint Frequently Asked Questions (FAQs) regarding ACA implementation, and primarily addressing three certain reimbursement strategies that are not allowed under the ACA. Further, the FAQ made clear that if employers pursue these strategies, they may be subject to penalties, such as excise taxes. Although previous guidance has been issued on some of these arrangements over the past year, this most recent guidance brings us up to date on the practice of cash reimbursements and the provision of health insurance.

Q. Can an employer offer employees cash to reimburse them for purchasing an individual market policy?

A. No. Any arrangement for reimbursing employees for the purchasing of an individual market policy is considered group health coverage, without regard to whether the employer treats the money as pre-tax or post-tax to the employee. As a group health plan, this arrangement becomes subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA), and thus subject to the ACA.

Q. Can an employer offer employees with high claims risk a choice between enrollment in its health plan or cash?

A. No. Current federal law prohibits discrimination based on one or more health factors. Federal regulations do allow, however, for more favorable rules for eligibility and reduced premiums or contributions based on adverse health factors, often referred to as benign discrimination. With that being said, the cash-or-coverage arrangements set forth in the question above are not considered permissible benign discrimination.

One reason, asserted by the DOL, is that these high-risk employees are being discriminated against in that they are paying more for their health coverage. The DOL gives the following example to illustrate its point:

For example, if the employer's group health plan requires all employees to pay $2,500 toward the cost of employee-only coverage under the plan, but the employer offers a high-claims-risk employee $10,000 in additional compensation if the employee declines the coverage, for purposes of discrimination analysis, the effective required contribution by that high-claims-risk employee for plan coverage is $12,500 ' that is, the $2,500 required employee contribution for employee-only coverage under the employer's plan, plus the $10,000 of additional compensation that the employee would forgo by enrolling in the plan. Because a high'claims-risk employee must effectively contribute more to participate in the group health plan, the arrangement violates the rule that a group health plan may not on the basis of a health factor require any individual (as a condition of enrollment) to pay a premium or contribution which is greater than the premium or contribution for a similarly situated individual enrolled in the plan.

See FAQs About Affordable Care Act Implementation (Part XXII), Nov. 6, 2014, Q2.

Second, the DOL reiterates the distinction between the above discrimination and benign discrimination. The DOL states its current regulations “permit providing, based on an adverse health factor, enhancements to eligibility for coverage under the plan itself but not cash as an alternative to the plan.” Id. “In particular, the regulations permit providing plan eligibility criteria that offer extended coverage within the plan and subsidization of the cost of coverage within the plan based in an adverse health factor.” Id . Such an example may be providing coverage free to disabled employees, while other employees pay a participant contribution toward their own group health coverage. See id . The question asserted is outside of the current regulations, as determined by the Department, in that the current regulations permit the benign discrimination within the terms of the existing health plan itself, but not in cases that fall outside of such existing health plan, such as a cash-or-coverage arrangement.

Thus, these cash-or-coverage arrangements will violate these nondiscrimination provisions, regardless of whether: 1) the employer treats the cash pre-tax or post-tax for the employee; 2) the employer is involved in purchasing or selecting any individual market product; or 3) the employee obtains any individual health insurance.

Q. Can an employer cancel its health insurance plan and offer a health reimbursement arrangement or other reimbursement-type product through a broker or agent who helps employees select individual policies, and allows eligible employees to access premium tax credits for federal exchanges?

A. No. The health reimbursement arrangements (HRAs) or other reimbursement-type product described above are group health plans and must comply with both ERISA and the ACA. Further, because these are employer-sponsored group health plans, employees participating in such arrangements may be ineligible for premium tax credits for the federal exchanges. The employer's lack of involvement with the employee's individual selection or purchase of his or her individual coverage does not prevent such arrangement from being a group health plan. Many factors are weighed to determine whether or not such coverage falls under the umbrella of an ERISA plan, including, for example, the “employer's involvement in the overall scheme” and the “absence of an unfettered right by the employee to receive the employer contributions in cash.” See FAQs About Affordable Care Act Implementation (Part XXII), Nov. 6, 2014, Q3. Moreover, such HRAs cannot be integrated with individual policies to meet these ACA requirements.

Conclusion

As the fifth year of the ACA comes to a close in 2015, and as the first year of the employer mandate began Jan. 1, 2015, for large employer, calendar-year plans, the fluidity of the law continues the be apparent. The reporting numbers will be impactful and revealing at the end of this first employer mandate year. The data harvested from that reporting will be crucial to future movement of this law, both in the regulatory arena and in the business arena.

The bottom line is: Options for strategies are narrowing for plan sponsors as the legislation and accompanying guidance broadens, and this is just the first year of the mandate.

Jennifer S. Kiesewetter is a partner in the Memphis, TN, office of Butler Snow LLP. Her practice encompasses a wide range of regulatory compliance issues. She can be reached at [email protected].

The year 2015 is here and so is the Affordable Care Act's (ACA) employer “play or pay” mandate, which has been delayed, in total or in part, twice. On July 2, 2013, the Administration delayed the employer mandate for employers with more than 50 employees until 2015. Then on Feb. 10, 2014, the Administration extended time to provide health insurance to full-time employees to certain employers . Under the February extension, employers with 50 to 99 employees will have until 2016 before the federal penalty kicks in for not providing health insurance to full-time workers. Further, the February extension granted some relief to large companies, in that it stated that companies with 100 or more employees need only offer coverage to 70% of full-time workers in 2015, and then to 95% of full-time workers in 2016 and beyond before the federal penalties kick in.

Now, the first quarter of 2015 has just ended, and the employer mandate was immediately effective as of Jan. 1 for calendar year plans for large employers. Those with fiscal plan years may have until the first day of their 2015 plan year to satisfy the mandate, if certain requirements are first satisfied. For purposes of this article, large employers with calendar year plans will be the focus for ease of discussion and applicability.

Penalties

Effective Jan. 1, 2015, two penalties can occur under the employer mandate. These penalties have also been cited as the employer-shared responsibility payments, and, as mentioned above, are also sometimes known as the play or pay mandate, or penalties. Although these payments or penalties have been referenced by many names, they boil down to real dollars that can impact the bottom line:

1. Failure to Offer Health Coverage At All

• $2,000 annual penalty applies to a large employer that does not offer health coverage to at least 70% of its full-time employees (and their children) for 2015 and only if any full-time employee receives a federal subsidy to purchase insurance on a governmental health exchange.
• $2,000 annual penalty applies to a large employer that does not offer health coverage to at least 95% of its full-time employees (and their children) for 2016 and beyond and only if any full-time employee receives a federal subsidy to purchase insurance on a governmental health exchange.
• For 2015 only , this penalty exempts the employer's first 80 full-time employees. For 2016 and beyond, the penalty exempts the employer's first 30 full-time employees.
• Thus, for 2015, the penalty is assessed monthly on all of the employer's full-time employees, minus the 80 full time employees, if 70% of its full-time employees (and their children) are not covered, and only if any full-time employee receives a federal subsidy to purchase insurance on a governmental health exchange.

2. Failure to Offer Health Coverage of 'Minimum Value' and 'Affordable'

• $3,000 annual penalty that applies to each full-time employee who is not offered health coverage that is of “minimum value” and only if any full-time employee receives a federal subsidy to purchase insurance on a governmental health exchange.
• $3,000 annual penalty that applies to each full-time employee who is not offered health coverage that is “affordable” and only if any full-time employee receives a federal subsidy to purchase insurance on a governmental health exchange.
• A plan provides minimum value when it covers at least 60% of the total allowed cost of benefits that are expected to be incurred under the plan. IRS Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act, #20. The Department of Health and Human Services (HHS) and the Internal Revenue Service (IRS) have produced a minimum value calculator to aid in determining whether plans satisfy this threshold.
• A plan provides affordable health coverage if the employee's share of the premium for the employer-provided coverage would cost the employee less than 9.56% (for 2015) of the employee's income.

The first penalty would more than likely be substantially greater than the second penalty for most employers. To avoid the harshest of penalties under the above employer mandate, some employers have explored ways to offer appropriate coverage to avoid the first penalty but to consider some options on coverage, such as “skinny plans” that would, perhaps, implicate the latter penalty with respect to only those employees who received federal subsidies to purchase insurance on a governmental exchange, because such coverage offered was either unaffordable or did not meet the minimum value standards.

Employers would have some insight to this number of employees receiving subsidies on the federal exchangves due, in part, to the Administration's delay of the employer mandate. Because the mandate was delayed to 2015, employers have already received employee premium tax credit notices for 2014, which gave them insight into their workforce. In 2015, these notices will demand review, responses, tracking, and possibly appeal. However, for the first year's receipt of these notices, employers have gained critical insight into their workforce's activity on the exchanges and who is receiving federal subsidies. This information can help to pave the path for strategies moving forward with respect to not offering coverage or offering alternative coverage, such as “skinny plans.”

Implications of Offering 'Skinny Plans'

Controversy has surrounded “skinny plans” on whether or not they satisfy the minimum value threshold required under the second penalty scenario. In fact, these plans over the past year or so have also been called “minimum value plans,” or “minimum essential coverage plans” (MEC plans). Essentially, these plans provide for some health care coverage services, but may exclude others, such as in-patient hospital services, or may just provide preventative services. So do they provide minimum value under ACA? Or if offered, would employers be providing health coverage that does not provide minimum value and thus fall into the second penalty arena?

On Nov. 4, 2014, the Internal Revenue Service issued IRS Notice 2014-69, clarifying that any skinny plan that fails to provide substantial coverage for in-patient hospitalization services or physician services (or both) (“Non-Hospital/Non-Physician Services Plan”) does not meet the minimum value requirements under the ACA. The Department of Health and Human Services (HHS), the Treasury Department and the IRS plan to issue proposed regulations on this clarification this year. Accordingly, employers will not be able to use the Minimum Value calculator to demonstrate that these Non-Hospital/Non-Physician Services Plans provide minimum value. Therefore, the IRS has stated that these plans should not be adopted for a 2015 plan year. If employers adopted these plans prior to Nov. 4, 2014, the IRS has offered transitional relief, so long as certain conditions have been satisfied.

The clarification in Notice 2014-69 answers the question for certain skinny plans on the satisfaction of minimum value requirement. These plans would not satisfy this requirement, thus exposing the employer to the second penalty if this is the only plan the employer offers.

But what if this is not the only plan the employer offers? What if, based on workforce, the employer offers a compliant health coverage plan that meets the tests for minimum value and affordability and then offers a skinny plan? Or better termed, a minimum essential coverage or MEC plan? Why does the terminology change here? Because the strategy changes.

If the employer offers a fully compliant plan to all employees, it avoids both penalties, whether the employees sign up for coverage or not. Then, if the employer offers a second skinny or MEC plan that is admittedly skinny, employees who may not want to spend so much of their take-home pay on health insurance can sign up for the MEC plan while satisfying their personal obligation to have “minimum essential coverage” under the law. Those employees receive basic health care, preventative or otherwise, from the employer, and avoid the individual penalty. The employer may be able to structure the pricing of the fully compliant plan along with the MEC plan to achieve more favorable bottom line results.

In employing this approach, the employer needs to remember the discrimination rules while taking into account which plans are fully insured and which are self-funded, as this impacts discrimination determinations as well. However, when an employer is confronted with a workforce that may be hourly or has heavy turnover, for example, the above strategy may be desirable. In fact, for 2015, 16% of large employers are pursuing this very approach, according to a survey released in Aug. 2014 by the National Business Group on Health. See http://bit.ly/1EdvEP6.

Implications of Reimbursing Employees for Health Insurance

Instead of absorbing ACA penalties, or offering secondary plans, many employers would like to structure cash reimbursements to employees for individual purchase of insurance. However, reimbursing employees directly for the purchase of insurance could subject the employers to significant excise taxes.

On Nov. 6, 2014, the Departments of Labor (DOL), Health and Human Services (HHS), and the Treasury issued a joint Frequently Asked Questions (FAQs) regarding ACA implementation, and primarily addressing three certain reimbursement strategies that are not allowed under the ACA. Further, the FAQ made clear that if employers pursue these strategies, they may be subject to penalties, such as excise taxes. Although previous guidance has been issued on some of these arrangements over the past year, this most recent guidance brings us up to date on the practice of cash reimbursements and the provision of health insurance.

Q. Can an employer offer employees cash to reimburse them for purchasing an individual market policy?

A. No. Any arrangement for reimbursing employees for the purchasing of an individual market policy is considered group health coverage, without regard to whether the employer treats the money as pre-tax or post-tax to the employee. As a group health plan, this arrangement becomes subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA), and thus subject to the ACA.

Q. Can an employer offer employees with high claims risk a choice between enrollment in its health plan or cash?

A. No. Current federal law prohibits discrimination based on one or more health factors. Federal regulations do allow, however, for more favorable rules for eligibility and reduced premiums or contributions based on adverse health factors, often referred to as benign discrimination. With that being said, the cash-or-coverage arrangements set forth in the question above are not considered permissible benign discrimination.

One reason, asserted by the DOL, is that these high-risk employees are being discriminated against in that they are paying more for their health coverage. The DOL gives the following example to illustrate its point:

For example, if the employer's group health plan requires all employees to pay $2,500 toward the cost of employee-only coverage under the plan, but the employer offers a high-claims-risk employee $10,000 in additional compensation if the employee declines the coverage, for purposes of discrimination analysis, the effective required contribution by that high-claims-risk employee for plan coverage is $12,500 ' that is, the $2,500 required employee contribution for employee-only coverage under the employer's plan, plus the $10,000 of additional compensation that the employee would forgo by enrolling in the plan. Because a high'claims-risk employee must effectively contribute more to participate in the group health plan, the arrangement violates the rule that a group health plan may not on the basis of a health factor require any individual (as a condition of enrollment) to pay a premium or contribution which is greater than the premium or contribution for a similarly situated individual enrolled in the plan.

See FAQs About Affordable Care Act Implementation (Part XXII), Nov. 6, 2014, Q2.

Second, the DOL reiterates the distinction between the above discrimination and benign discrimination. The DOL states its current regulations “permit providing, based on an adverse health factor, enhancements to eligibility for coverage under the plan itself but not cash as an alternative to the plan.” Id. “In particular, the regulations permit providing plan eligibility criteria that offer extended coverage within the plan and subsidization of the cost of coverage within the plan based in an adverse health factor.” Id . Such an example may be providing coverage free to disabled employees, while other employees pay a participant contribution toward their own group health coverage. See id . The question asserted is outside of the current regulations, as determined by the Department, in that the current regulations permit the benign discrimination within the terms of the existing health plan itself, but not in cases that fall outside of such existing health plan, such as a cash-or-coverage arrangement.

Thus, these cash-or-coverage arrangements will violate these nondiscrimination provisions, regardless of whether: 1) the employer treats the cash pre-tax or post-tax for the employee; 2) the employer is involved in purchasing or selecting any individual market product; or 3) the employee obtains any individual health insurance.

Q. Can an employer cancel its health insurance plan and offer a health reimbursement arrangement or other reimbursement-type product through a broker or agent who helps employees select individual policies, and allows eligible employees to access premium tax credits for federal exchanges?

A. No. The health reimbursement arrangements (HRAs) or other reimbursement-type product described above are group health plans and must comply with both ERISA and the ACA. Further, because these are employer-sponsored group health plans, employees participating in such arrangements may be ineligible for premium tax credits for the federal exchanges. The employer's lack of involvement with the employee's individual selection or purchase of his or her individual coverage does not prevent such arrangement from being a group health plan. Many factors are weighed to determine whether or not such coverage falls under the umbrella of an ERISA plan, including, for example, the “employer's involvement in the overall scheme” and the “absence of an unfettered right by the employee to receive the employer contributions in cash.” See FAQs About Affordable Care Act Implementation (Part XXII), Nov. 6, 2014, Q3. Moreover, such HRAs cannot be integrated with individual policies to meet these ACA requirements.

Conclusion

As the fifth year of the ACA comes to a close in 2015, and as the first year of the employer mandate began Jan. 1, 2015, for large employer, calendar-year plans, the fluidity of the law continues the be apparent. The reporting numbers will be impactful and revealing at the end of this first employer mandate year. The data harvested from that reporting will be crucial to future movement of this law, both in the regulatory arena and in the business arena.

The bottom line is: Options for strategies are narrowing for plan sponsors as the legislation and accompanying guidance broadens, and this is just the first year of the mandate.

Jennifer S. Kiesewetter is a partner in the Memphis, TN, office of Butler Snow LLP. Her practice encompasses a wide range of regulatory compliance issues. She can be reached at [email protected].